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How Dodd-Frank Rollback Bill Could Come Back to Haunt Us: DealBook Briefing

Credit...Tom Brenner/The New York Times

Good Tuesday. Here’s what we’re watching:

• Why Lowe’s poaching of J.C. Penney’s C.E.O. matters.

• Tesla has a new batch of problems to worry about.

• What the Supreme Court’s arbitration ruling means for Uber and others.

• Sony strikes a deal for the Spotify era.

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Congress on Tuesday passed legislation that frees banks from a variety of regulations that were imposed after the financial crisis of 2008.

Small- and medium-sized banks stand to get the most relief from the Economic Growth, Regulatory Relief and Consumer Protection Act, though it also makes significant concessions to the largest lenders. Some elements of the bill, which had bipartisan support, make sense. The legislation, for instance, makes life easier for small banks in ways that most likely won’t endanger the wider financial system. But it also rolls back innovative measures that were introduced after the crisis to strengthen larger banks.

The new bill, sponsored by Senator Mike Crapo, Republican of Idaho, was passed as United States banks are reporting record results. But then Congress often chooses to loosen the rules in good times. Some relaxation is possible now because the banks are much stronger than they were a decade ago. Still, the bill could come back to haunt us when the next financial storm hits. Here are three ways in which it potentially leaves the system and taxpayers exposed.

Less stressful tests. The Dodd-Frank Act of 2010, which did much to overhaul the United States financial system, required that banks undergo regular tests to assess whether they have the strength to weather large losses. Banks have complained that the stress tests were burdensome. But the tests raised awareness about the risks lurking on the banks’ balance sheets – and forced regulators and banks to try and quantify potential losses. Under the new legislation, banks with under $100 billion in assets would no longer be subject to the tests. For banks with between $100 billion and $250 billion in assets, the bill allows regulators to stop testing every year, and instead, do so “on a periodic basis.”

This change provides a big opening to officials at the Fed who are eager to deregulate. They could decide to perform the tests, say, every two years, or allow for an even longer break. During the untested period, the banks could grow complacent about risks. Crucially, the stress tests also help determine a bank’s level of capital, its main defense against losses. As a result, banks with $100 billion to $250 billion in assets could let their capital levels decline during the untested period, leaving them less protected against losses. With more than $2 trillion in combined assets, the banks could report large losses in a future crisis.

The nation’s largest banks, those with more than $250 billion in assets, also get a stress test concession under the new legislation. Dodd-Frank required these banks (and others) to apply their own stress tests to their balance sheets at least once a year, but the new law allows the Fed to demand these tests “periodically.” These bank-run tests have allowed regulators to assess the quality of the largest banks’ risk management. If the Fed requires these company tests less frequently, regulators may end up with less insight into how the most systemically important banks are preparing for shocks.

Killing off living wills. The bill frees many banks from another common sense measure that Dodd-Frank introduced. Larger banks were required under Dodd-Frank to draw up and regularly update a detailed plan for how they would be wound down. The aim of these “living wills” was to make it easier for regulators to seize a failing bank without disrupting the wider financial system. The fear of chaotic disruption was in part behind the government’s decision 10 years ago to bail out the banks or force them to be acquired by larger institutions. But the bill effectively allows banks with under $250 billion in assets to stop drawing up living wills. “This is one of our biggest concerns,” said Gregg Gelzinis of the Center for American Progress, which opposes much of the new bill, “In the crisis, regulators resorted to merging banks because there was no tool to wind them down.” Under the new banking law, the Fed can decide to force banks with over $100 billion to comply with “enhanced supervision” requirements, which include the living will. But, again, whether the Fed does so now depends on who’s in charge at the regulator, not the law.

Risky real estate. The new bill also allows banks to lower their defenses against losses on loans to developers building offices and other types of commercial buildings. The post-crisis overhaul demanded that banks hold higher capital against certain types of these loans, in part because they produced crippling losses for banks big and small after the financial crisis. The new bill would allow banks to reclassify many of these loans in such a way that they avoid the higher capital requirement. This move comes after a surge in commercial real estate lending. Banks in the United States currently have $2.12 trillion of commercial real estate loans on their books, an increase of $680 billion, or nearly 50 percent, from $1.44 trillion five years ago. “The commercial real estate market is overheated,” said Marcus Stanley, policy director of Americans for Financial Reform, which opposes much of the new bill, “We are coming in at the top of the economic cycle and we are trying to juice this even more.”

— Peter Eavis

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Marvin Ellison, the outgoing C.E.O. of J.C. PenneyCredit...Jessica A. Stewart/The St. Joseph News-Press, via Associated Press

There are a couple of reasons Wall Street is taking note of Lowe’s hiring of Marvin Ellison:

• He is leaving Penney at a crucial time for brick-and-mortar retailers, particularly department stores. The company has failed to turn itself around for years under a succession of C.E.O.s, from the former Apple retail chief Ron Johnson to Mike Ullman to Mr. Ellison himself. Shares in Penney have fallen some 87 percent over the past five years and tumbled again on Tuesday amid questions about the retailer’s direction. (For now, Mr. Ellison will be replaced by a committee of executives comprising the “Office of the C.E.O.”)

• Mr. Ellison is coming to Lowe’s as that company grapples with upheaval itself. The home improvement retailer previously announced that its outgoing C.E.O., Robert Niblock, was retiring as the company negotiated with the activist investor D.E. Shaw.

• It’s worth noting that Mr. Ellison is one of only a few black C.E.O.s in the Fortune 500, alongside Roger Ferguson of TIAA, and Ken Frazier at Merck.

— Michael de la Merced

Critics’ corner

• Elizabeth Winkler of WSJ’s Heard on the Street writes: “Investors who have been hanging on to the stock in hope of a turnaround might want to do the same...It seems less and less likely that Penney’s decline can be reversed.”

• Sarah Halzack of Bloomberg Opinion writes: “You might look at J.C. Penney’s latest quarterly results – which included a paltry increase in comparable sales that executives blamed on weird weather – and wonder why the retailer should be particularly sad to see Ellison go. But over the long haul, it’s clear he has done plenty of good for the struggling chain.”

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Credit...Joel Saget/Agence France-Presse — Getty Images

Mark Zuckerberg, the social network’s chief executive, faced a litany of questions from European lawmakers over his company’s vast power. Here are three points from members of Parliament that caught DealBook’s attention:

Make it accountable to its users. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe, pointed out that Mr. Zuckerberg has apologized 15 or 16 times over the years.

“If you’ve already confronted so many dysfunctions, there has to be clearly a problem,” Mr. Verhofstadt said. “It’s a little bit like the banks.”

He also asked whether Facebook could compensate European users for the way their data is being used, asking: “What will be the amount that you give them?”

Tear it up. Many lawmakers said that Facebook claims that it competes with the likes of Apple and Google are misplaced, arguing that Facebook is, in fact, a monopoly. Some went further than that, with Manfred Weber, a German member of the legislature, asking: “Can you convince me not to break up Facebook?”

Probe more of its operations. Claude Moraes of British Labour Party pointed out that the recent furor over Facebook’s data may be “the tip of the iceberg,” and that the social network’s decision to block 200 apps from its platform could be “a clear signal that Facebook failed to protect the privacy of its users.” Lawmakers could make a push to find out more about historical infringements.

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Credit...Dado Ruvic/Reuters

A sequel to the Meltdown and Spectre flaws that made headlines in January will probably be shrugged off by the likes of Intel and AMD.

Wired reports that security researchers from Microsoft and Google have discovered a new bug, related to Meltdown and Spectre, that puts chips made by Intel, AMD and Arm at risk of being hacked. If exploited, the flaw could allow hackers to gain access to private user data inside the chips.

Intel says that it has not seen the flaw being exploited yet, and that it has already written software patches that should protect users from attack. They will be rolled out by computer makers in the coming weeks. But a big problem with Meltdown and Spectre was that they were fundamental flaws in the chips, and software fixes to solve the issues slowed devices down.

The new flaw will lead to the same problem: Intel says that users could see a 2 percent to 8 percent decrease in performance when updates are installed.

But we’ve been here before. And while the media reaction to the problem in January was huge, the impact on chip-makers was minimal. First-quarter earnings appeared to be unaffected by the security scare: Revenue rose about 40 percent at AMD and 9 percent at Intel, compared to the previous year.

Today, there’s no sign that either company is hurting all that much. AMD’s stock has barely wobbled. And Intel’s appears to have been buoyed by news that it will jointly manufacture new kinds of memory with the semiconductor maker Micron Technology.

Yet both firms still face challenges.

AMD has enjoyed recent success from some of its chips being used to mine cryptocurrency, but more specialized processors from other manufacturers are becoming popular in the Bitcoin community. And Intel still needs to ensure that it cements itself as a major player in A.I. chips, which is becoming harder as companies like Tesla, Apple, Google and Facebook design their own.

— Jamie Condliffe

President Trump walked back a threat to put tariffs on Chinese goods, and his administration has reportedly agreed on the outlines of a deal to save the Chinese telecom company ZTE. To critics, it looks like China has bested a divided White House.

From Andrew Ross Sorkin’s latest column:

To those on Wall Street and other executives who make a living negotiating, the deal struck by the president who wrote “The Art of the Deal” doesn’t look too artful. Not only that, the deal — to the extent there is one — raises all sorts of questions about Mr. Trump’s ability to extract concessions in future negotiations.

Others in Washington are still trying to hammer Beijing, including lawmakers who want closer national security scrutiny of Chinese investments in the U.S. But tighter limits could hurt the U.S. companies the Trump administration is trying to help.

The view from China: Weibo users are fixated on the historical parallels with trade talks held in 1901.

Critics’ corner: Investors can breathe easier as a result of the trade truce — at least for now, according to Peter Eavis. But tensions are likely to hang over the markets for a while, Nathaniel Taplin of Heard on the Street argues.

CNBC reports that the Senate Banking Committee approved by a 23-to-2 margin an amendment to limit President Trump’s ability to lift sanctions on Chinese telecommunications company.

Context: In an about-face nine days ago, President Trump indicated a willingness to rethink penalties on ZTE for violating U.S. sanctions on Iran and North Korea. The move has come under criticism from U.S. lawmakers.

Steven Mnuchin, the Treasury Secretary, testified before the Senate Appropriations Committee and said of the White House’s negotiations on ZTE:

“This was not a quid-pro-quo or anything else. This was merely President Xi asking President Trump to look into this, which he’s done. Any changes to this will fully support the mandate of making sure our sanctions and our technology are protected.”

“I can assure you whatever the Commerce Department decides, the intelligence community has been part of the briefings and that we will make sure we will enforce national security issues.”

“The objective was not to put ZTE out of business. The objective was to make sure that they abide by our sanctions programs.”

Monday’s flurry of deal-making has pushed the value of acquisition announced this year past $2 trillion, the fastest to that level on record, according to Thomson Reuters.

Europe is providing the biggest boost to this year’s record pace. European deal volume stands at $713 billion so far this year. That nearly equals the full year totals hit the past two years for the region.

The biggest European deals announced this year include: Takeda’s $63 billion deal for Shire; E.On’s announced purchase of Innogy for $35 billion, and Comcast $31 billion bid for Sky.

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Tesla Model 3Credit...Tesla, via Associated Press

Elon Musk plans to focus sales of the Model 3 on the more expensive vehicle — $78,000, without the $5,000 Autopilot feature, rather than the $35,000 base model. Why? Selling the cheaper car would cause Tesla “to lose money and die.”

But Tesla has other worries, too:

• The Consumer Reports review of the Model 3 notes “record range and agile handling,” but says the stopping distance of 152 feet is “far worse than any contemporary car” it’s tested.

• The driver of a Model S crashed into a pond and died in the San Francisco Bay Area. It’s unclear if the car was in Autopilot mode at the time.

Despite all that, some investors are bullish, hoping that the pricier Model 3 could boost margins.

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Credit...Eric Thayer/Reuters

The ruling that employers can force workers into individual arbitration could limit companies’ exposure to class-action lawsuits over issues like wages and hours. (It could be bad news for Uber drivers battling the ride-hailing company over pay.)

Critics of the ruling asserted that it could also affect fights over discrimination and harassment.

• The House is scheduled to vote today on rolling back some Dodd-Frank rules. But most provisions that Republicans dislike remain in place.

• Michael Cohen reportedly helped connect a Trump campaign donor with Qatar’s sovereign wealth fund. (WSJ)

• Don Blankenship, the former Massey Energy C.E.O., lost the Republican primary for West Virginia’s Senate seat, but he’s running as a third-party candidate. (NYT)

• Twitter bots most likely played a large role in both the 2016 presidential election and the Brexit vote, according to the National Bureau of Economic Research. (Bloomberg)

• British lawmakers say London is still a “laundromat” for dirty Russian money. Foreign Secretary Boris Johnson may seek tougher sanctions on Russia.

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The Sony C.E.O., Kenichiro YoshidaCredit...Martin Bureau/Agence France-Presse — Getty Images

The company is striking a $2.3 billion deal for majority control of EMI Music Publishing — whose catalog runs from “Over the Rainbow” to Beyoncé. Behind the agreement is the rising value of music assets in the Spotify era. Yesterday’s deal more than doubles EMI’s valuation from 2011. (It also marks a return of Sony’s financial swagger.)

Critics’ corner, G.E. edition: General Electric confirmed that it would combine its transportation business with Wabtec in a tax-free transaction valued around $11 billion. It’s a decent deal, but not a transformational move, Tom Buerkle of Breakingviews says. Lex reckons that investors will be disappointed.

Elsewhere in deals:

• Britain probably won’t block Comcast’s bid for Sky.

• How Elliott Management beat Hyundai.

• Investors didn’t love Fifth Third’s $4.7 billion bid for MB Financial.

• IHS Market bought the data provider Ipreo for $1.9 billion.

• GreenSky’s I.P.O. will test investor appetite for online lenders.

• SafetyCulture raised one of Australia’s biggest-ever venture capital rounds.

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Robert ShillerCredit...Pedro Pardo/Agence France-Presse — Getty Images

Known for warnings about dot-com and housing bubbles, the Nobel laureate in economics has turned his attention to cryptocurrency. In a blog post yesterday, he compared Bitcoin to previous currency experiments that replaced dollars with tokens for hours of work or units of electricity:

The cryptocurrencies are a statement of faith in a new community of entrepreneurial cosmopolitans who hold themselves above national governments, which are viewed as the drivers of a long train of inequality and war … None of this is new, and, as with past monetary innovations, a compelling story may not be enough.

Crypto clampdown: Securities regulators in the U.S. and Canada have opened investigations into potentially deceitful cryptocurrency investment products.

• A new version of the Meltdown and Spectre chip bugs leaves processors from Intel, AMD and Arm vulnerable to hacks. (Wired)

• Facebook will work with Qualcomm to test a wireless replacement for fiber broadband, called Terragraph, next year. (PCWorld)

• A flaw in Comcast’s website could leak personal data from Xfinity customers. (ZDNet)

• A.I. could automate bank accounts and help people be savvier with their cash. (Forbes)

• Rehab marketers are flocking to Facebook groups that were set up to help people struggling with addiction. (Verge)

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Credit...Mark Lennihan/Associated Press

• Stacey Cunningham is set to become the N.Y.S.E’s first female president in its 226-year history. (Reuters)

• Her predecessor, Tom Farley, will reportedly lead a special investment vehicle created by Dan Loeb’s Third Point. (WSJ)

• Sean Bates, Deutsche Bank’s head of emerging markets debt trading, is the latest executive to leave the firm. (Business Insider)

The president has separate cellphones for voice calls and Twitter. But according to Politico, Mr. Trump doesn’t take device security as seriously as he might:

While aides have urged the president to swap out the Twitter phone on a monthly basis, Trump has resisted their entreaties, telling them it was “too inconvenient,” the same administration official said. The president has gone as long as five months without having the phone checked by security experts.

• The Obamas have signed a deal with Netflix to produce TV shows and movies. (NYT)

• Spain’s La Liga opposes the SoftBank consortium’s proposed expansion of FIFA’s tournaments. (FT)

• Americans born in the 1980s might not accumulate as much wealth as previous generations. (WSJ)

• When a company does well, do workers or shareholders benefit most? The Marx Ratio can help you find out. (The Upshot)

• Anticipated revenue from wind power generation has almost doubled in the past year. (Bloomberg)

• What’s the fiscal outlook for the United States? It’s “not good,” according to Goldman Sachs. (CNBC)

We’d love your feedback. Please email thoughts and suggestions to bizday@nytimes.com.

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